Advanced Micro Devices (AMD) is probably the most interesting speculative play on the market. Despite the obvious competitive pressures that it faces from rival Intel (INTC) in the PC processor space and from giant Nvidia (NVDA) in the graphics space, there is a pretty decent chance that once the company sorts itself out, the stock could go to ~$5-6. The main driver for a bull thesis isn't market share gains in PC processors, but instead a diversification away from the PC. However, during the most recent earnings call, it seems that my suspicions about the firm's "Never Settle" bundle, in which the company basically gave away a bunch of high end games with their graphics cards to stimulate sales, came true.
Sales Up, Profit Down
While AMD's management bragged that they likely gained share in the high end desktop add-in graphics board market thanks to aggressive bundling, the harsh reality is that this came at the expense of operating profit. Take a quick look at the most recent earnings report to see just what I'm talking about:
So what we have is that while GPU sales were up 3% Q/Q, operating income in the segment was down 27% with the excuse given that there were lower GPU sales to OEMs. This is probably true, but it's deeper. See, when AMD sells GPUs to OEMs, it's not trying to entice them with bribes of free game codes. OEMs typically pick the part with the best performance per watt per dollar for the particular design that they are trying to sell, and it seems that as OEM sales are lower, AMD is losing market share among the OEMs, probably most markedly notebooks.
But to the retail add-in-board crowd, the free games obviously helped. Sure, the top line and probably market share numbers will look less dismal, but the bottom line got whacked and whacked hard despite both an increase in ASPs as well as market share gains in the top end of the discrete add-in-board market. This means that, as suspected, AMD is paying these game developers a bundle in order to be able to supply its customers with these game bundles. No surprise.
Is This A Strategic Move?
Nvidia has traditionally had a better developer relations team than AMD. That's why Nvidia's drivers are better, out-of-the-box game compatibility is better, and multi-GPU works better. That being said, AMD is probably trying to gain market share in PCs at the expense of profits in order to win over developer mind-share. The game console wins also are a nice, inexpensive way to do that, as the developers are essentially forced to learn the AMD hardware inside and out.
That being said, the argument that Nvidia is doomed as a result of the AMD console wins doesn't really hold water as it seems unlikely that Nvidia's developer relations team is sitting around twiddling its thumbs while AMD, to quote Rory Read, "steals the bacon". AMD owning the consoles is nice, and AMD winning more market share by (effectively) bribing its customers with free games is also nice, but this doesn't solve the long term problem that the company has: where are the GAAP earnings?
AMD's turnaround story is an interesting one, and if they can really hit free-cash-flow positive during 2H 2013, then I see big upside for the stock. That being said, don't let these "tricks" of shipping $150 worth of games with a "$449" video card to gain market share fool you into thinking things have fundamentally changed in the landscape; they haven't. AMD is buying itself some publicity for when the Jon Peddie GPU market share numbers come out, and it's this sort of "window dressing" that I'm seeing AMD do across all of its segments (from bragging about how great "Temash" and "Kabini" will be to promoting its market share gains) that could certainly help keep sentiment up while the fundamentals take their time to catch up.
Will the Street buy this? We'll find out soon enough.